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  • Author: David M. Arseneau, Brendan Epstein
  • Publication Date: 09-2014
  • Content Type: Working Paper
  • Institution: Board of Governors of the Federal Reserve System
  • Abstract: We study the role of labor market mismatch in the adjustment to a trade liberalization that results in the offshoring of high-tech production. Our model features two-sided heterogeneity in the labor market: high- and low-skilled workers are matched in a frictional labor market with high- and low-tech firms. Mismatch employment occurs when high-skilled workers choose to accept a less desirable job in the low-tech industry. The main result is that--perhaps counter-intuitively--this type of job displacement is actually beneficial for the labor market in the country doing the offshoring. Mismatch allows the economy to reallocate domestic high-skilled labor across both high- and low-tech industries. In doing so, mismatch dampens both the increase in the aggregate unemployment rate and the decline in aggregate wages that come as a consequence of shifting domestic production abroad.
  • Topic: Globalization, Industrial Policy, International Trade and Finance, Labor Issues, Work Culture, Labor Market
  • Political Geography: Global Focus
  • Author: Ruth Judson
  • Publication Date: 11-2013
  • Content Type: Working Paper
  • Institution: Board of Governors of the Federal Reserve System
  • Abstract: U.S. currency has long been a desirable store of value and medium of exchange in times and places where local currency or bank deposits are inferior in one or more respects. Indeed, as noted in earlier work, a substantial share of U.S. currency circulates outside the United States. Although precise measurements of stocks and flows of U.S. currency outside the United States are not available, a variety of data sources and methods have been developed to provide estimates. This paper reviews the raw data available for measuring international banknote flows and presents updates on indirect methods of estimating the stock of currency held abroad: the seasonal method and the biometric method. These methods require some adjustments, but they continue to indicate that a large share of U.S. currency is held abroad, especially in the $100 denomination. In addition to these existing indirect methods, I develop a framework and basic variants of a new method to estimate the share of U.S. currency held abroad. Although the methods and estimates are disparate, they provide support for several hypotheses regarding cross-border dollar stocks and flows. First, once a country or region begins using dollars, subsequent crises result in additional inflows: the dominant sources of international demand over the past decade and a half are the countries and regions that were known to be heavy dollar users in the early to mid-1990s. Second, economic stabilization and modernization appear to result in reversal of these inflows. Specifically, demand for U.S. currency was extremely strong through the 1990s, a period of turmoil for the former Soviet Union and for Argentina, two of the largest overseas users of U.S. currency. Demand eased in the early 2000s as conditions gradually stabilized and as financial institutions developed. However, this trend reversed sharply with the onset of the financial crisis in late 2008 and has continued since then.
  • Topic: International Trade and Finance, Currency, Banking, Economic Stability
  • Political Geography: North America, United States of America
  • Author: Jane T. Haltmaier
  • Publication Date: 01-2013
  • Content Type: Working Paper
  • Institution: Board of Governors of the Federal Reserve System
  • Abstract: The Chinese economy has been growing at a rapid pace for over thirty years. Most of this growth has come from higher labor productivity, while growth of employment has diminished along with a slower rate of increase in the working-age population. This paper looks at the challenges that China will face over the next two decades in maintaining its rapid pace of economic growth, especially as working-age population growth slows further and then begins to decline. Key questions include whether China will be able to continue to devote nearly half of its GDP to investment, whether such investment will become less productive as the capital-labor ratio continues to rise, whether labor participation and employment rates will fall as the population becomes less rural, and whether future shifts out of rural employment will go more toward the services rather than the manufacturing sector, where productivity is higher. In the baseline scenario economic growth falls gradually from its current pace of about 10 percent to near 6-1/2 percent by 2030. However, a combination of less optimistic, but still reasonable assumptions, results in a reduction in the growth rate to about 1-1/2 percent by 2030.
  • Topic: International Trade and Finance, GDP, Employment, Economic Growth
  • Political Geography: China, Asia
  • Author: Sewon Hur, Illenin O. Kondo
  • Publication Date: 02-2013
  • Content Type: Working Paper
  • Institution: Board of Governors of the Federal Reserve System
  • Abstract: Emerging economies, unlike advanced economies, have accumulated large foreign reserve holdings. We argue that this policy is an optimal response to an increase in foreign debt rollover risk. In our model, reserves play a key role in reducing debt rollover crises ("sudden stops"), akin to the role of bank reserves in preventing bank runs. We find that a small, unexpected, and permanent increase in rollover risk accounts for the outburst of sudden stops in the late 1990s, the subsequent increase in foreign reserves holdings, and the salient resilience of emerging economies to sudden stops ever since. Finally, we show that a policy of pooling reserves can substantially reduce the reserves needed by emerging economies.
  • Topic: Economics, Emerging Markets, Risk, Foreign Reserves
  • Political Geography: Global Focus
  • Author: Toshihiko Mukoyama
  • Publication Date: 02-2013
  • Content Type: Working Paper
  • Institution: Board of Governors of the Federal Reserve System
  • Abstract: This paper analyzes the job-to-job transitions of workers in the United States. I propose a new method of correcting the time-aggregation bias. The bias-corrected series from 1996 to 2011 reveals a procyclical pattern of job-to-job transition and a large decline since the beginning of the 2000s. I construct a model of on-the-job search and explore the implications of this phenomenon. The calibrated model shows that the decline in the reallocation of workers through job-to-job transitions has had a substantial effect on total factor productivity (TFP). From 2009 to 2011, the model accounts for about 0.5%-0.7% annual decline in TFP.
  • Topic: Employment, Job Creation, Labor Market, Productivity
  • Political Geography: Global Focus
  • Author: Daniel O. Beltran, Larry Cordell, Charles Thomas
  • Publication Date: 03-2013
  • Content Type: Working Paper
  • Institution: Board of Governors of the Federal Reserve System
  • Abstract: A key feature of the 2007 financial crisis is that for some classes of securities trade has practically ceased. And where trade has occurred, it appears that market prices are well below their intrinsic values. This seems especially true for those securities where the payoff streams are particularly complex, for example, structured finance ABS CDOs. One explanation for this is that information about these securities' intrinsic values since the crisis has been asymmetric, with current holders having better information than potential buyers. We first characterize the information asymmetries that were present in the structured finance ABS CDO market. Because many of the CDO dealers had partially or fully integrated the pipeline from mortgage originations through CDO issuance, they had informational advantages over potential buyers that could well have disrupted trading in CDOs as the crisis took hold in August of 2007. Using a "workhorse" model for pricing securities under asymmetric information and a novel dataset for the intrinsic values of ABS CDOs, we show how the resulting adverse selection problem could explain why the bulk of these securities either trade at significant discounts to their intrinsic values or do not trade at all.
  • Topic: Security, Economics, Financial Crisis, Fiscal Policy
  • Political Geography: Global Focus
  • Author: Carlos Ó. Arteta, Mark Carey, Ricardo Correa, Jason Kotter
  • Publication Date: 04-2013
  • Content Type: Working Paper
  • Institution: Board of Governors of the Federal Reserve System
  • Abstract: We empirically examine financial institutions' motivations to take systematic bad-tail risk in the form of sponsorship of credit-arbitrage asset-backed commercial paper vehicles. A run on debt issued by such vehicles played a key role in causing and propagating the liquidity crisis that began in the summer of 2007. We find evidence consistent with important roles for both owner-manager agency problems and government-induced distortions, especially government control or ownership of banks.
  • Topic: Economics, Financial Crisis, Risk, Banking, Commercialization
  • Political Geography: Global Focus
  • Author: Stephanie E. Curcuru, Charles Thomas, Francis E. Warnock
  • Publication Date: 04-2013
  • Content Type: Working Paper
  • Institution: Board of Governors of the Federal Reserve System
  • Abstract: Estimates of U.S. returns differentials have ranged from exorbitant to quite small, in part because of their volatility coupled with the relatively short time series available. We shed light on underlying drivers of returns differentials by presenting a number of decompositions: a by-asset-class decomposition into yields and capital gains, the Gourinchas and Rey (2007a) composition and return effects, and further decompositions of capital gains that focus on exchange rate effects. While each decomposition informs thinking about returns differentials, one constant is evident throughout: to date the existing differential favoring the U.S. has owed primarily to one factor, a differential in direct investment yields. We discuss how our analysis informs the income puzzle (of positive net income flows to the U.S. even as its net international investment position is negative and substantial) and the position puzzle (of a sizeable gap between the reported U.S. net international position and cumulated current account deficits), provide an initial assessment of the literature on the dynamics of returns differentials, and present a framework to guide a forward-looking view of how returns differentials might evolve in the future.
  • Topic: Foreign Direct Investment, Financial Markets, Investment, Stock Markets
  • Political Geography: North America, United States of America
  • Author: Torben G. Andersen, Dobrislav Dobrev, Ernst Schaumburg
  • Publication Date: 04-2013
  • Content Type: Working Paper
  • Institution: Board of Governors of the Federal Reserve System
  • Abstract: We provide a first in-depth look at robust estimation of integrated quarticity (IQ) based on high frequency data. IQ is the key ingredient enabling inference about volatility and the presence of jumps in financial time series and is thus of considerable interest in applications. We document the significant empirical challenges for IQ estimation posed by commonly encountered data imperfections and set forth three complementary approaches for improving IQ based inference. First, we show that many common deviations from the jump diffusive null can be dealt with by a novel filtering scheme that generalizes truncation of individual returns to truncation of arbitrary functionals on return blocks. Second, we propose a new family of efficient robust neighborhood truncation (RNT) estimators for integrated power variation based on order statistics of a set of unbiased local power variation estimators on a block of returns. Third, we find that ratio-based inference, originally proposed in this context by Barndorff-Nielsen and Shephard (2002), has desirable robustness properties in the face of regularly occurring data imperfections and thus is well suited for empirical applications. We confirm that the proposed filtering scheme and the RNT estimators perform well in our extensive simulation designs and in an application to the individual Dow Jones 30 stocks.
  • Topic: Economics, Markets, Models, Stock Markets
  • Political Geography: Global Focus
  • Author: Brendan Epstein, Ryan Nunn
  • Publication Date: 04-2013
  • Content Type: Working Paper
  • Institution: Board of Governors of the Federal Reserve System
  • Abstract: A large public finance literature argues that taxable income elasticities are a sufficient statistic for the social welfare consequences of taxation. We develop calibrations that show such deadweight loss calculations are overestimates proportional to the quantitative significance of heterogeneity in amenities across job matches. In particular, the endogenous supply of amenities can substantially exacerbate this overestimation in both static and dynamic environments. Given the possibility of gradual migration of workers into more amenity-focused job matches in response to tax increases, welfare calculations based on long-run taxable income elasticities can be more misleading than those based on short-run elasticities.
  • Topic: Governance, Tax Systems, Fiscal Policy, Welfare, Social Services
  • Political Geography: Global Focus